The Hawley-Smoot Border Policy

Will the credit crisis trigger a downturn? (The Economist, 9/20/2007)

AT THE climax of “The Day the Earth Caught Fire”, a science-fiction film made in 1961, the fate of the planet hangs in the balance. The world's great powers decide to detonate nuclear bombs, hoping to push the Earth off a collision course with the sun. Do they succeed? The final scene shows two versions of the next day's Daily Express: the headline on the first reads “World Saved”; the other, “World Doomed”.

In the 2007 sequel, “The Day the Credit Markets Seized Up”, Wall Street seemed this week almost to have made up its mind about the ending: World Saved, Probably. Financial markets had expected the Federal Reserve to cut interest rates by a quarter of a percentage point on September 18th, but prayed fervently for a half. When the half came, America's markets rejoiced: the S&P 500 index enjoyed its largest rise on a single day since January 2003; the next day share prices elsewhere jumped for joy and junk-bond markets sprang back to life.

If you're a regular reader of the The Economist, the next paragraph is laughably predictable:

But on sober appraisal, there is less cause for celebration.

The Economist always believes that on sober appraisal, there is less cause for celebration.  They pride themselves on providing that sober appraisal to offset the perpetual irrationally exuberant animal spirits of the market.  The truth is, of course, that more often than not their hen-clucking pessimism has been proven more or less unwarranted, and the exuberance has been more or less vindicated by events.  That said, if you correct for their perpetual undershooting, The Economist isn't too bad a guide.

One factor in the downturn has been little noted: immigration.  The Feds have, alas, been getting nasty lately, sending out letters to employers warning them about "no match" Social Security numbers.  That started in August.  Lower immigration expectations naturally reduce house prices, since part of the price of a house comes from capitalized expectations of its future value, which is a function of demand, which is a function of, among other things, immigration.  Rising house prices have done much to sustain the boom in recent years, as people's rising net worth has spurred them to spend.  Current house prices probably reflect the market pricing in immigration expectations.  In that sense it could be justified; but an immigration crackdown could turn it into a bubble and deflate it.  Falling net worth could create more credit crises, and would surely reduce spending. 

Now, there's a certain justice in people who agitated for deportation seeing their home prices collapse, or-- still better-- for getting evicted.  What they have desired to do to others has been done to them.  But here's the problem: lots of people who are innocent of animosity against immigrants are being punished too.  That's the problem with big government programs: we're all in the same boat, and wise dissenters have to pay for the stupidity and wickedness of others.

Comments

[Nato]

No no, remember all the times after the doom-and-gloom lead in which the counterpoint was "hopeful signs" or that "there may be a light at the end of the tunnel." It seems to me that it's their customary style to contradict the first paragraph or two, and the real editorial stance comes out in the penultimate paragraph.